On 28 November 2023, the European Commission published the results of the evaluation of Regulation (EU) 2019/452 (“FDI Screening Regulation“), which is intended to serve as the basis for the evaluation and revision of the FDI Screening Regulation. This blog post summarises the key findings of the evaluation report, highlights possible implications for the upcoming reform of the FDI Screening Regulation and provides an outlook on FDI screening in the EU moving forward.
Continuing importance of FDI screening
The vast majority of respondents to the consultation recognised the continued importance of the protective purpose of the FDI Screening Regulation, which is to protect public order and security from risks posed by certain foreign direct investments. Respondents agreed that action at Union level has improved protection against these risks beyond what Member States could have achieved on their own. A total of 18 authorities and 15 companies were involved in the 47 responses.
Effectiveness and efficiency of the FDI screening regulation
There is disagreement among the consultation participants as to whether the supranational cooperation mechanism will lead to greater harmonisation of national FDI regulations. The same applies to the harmonisation of procedural aspects of national FDI mechanisms.
However, there is a broad consensus that the cooperation mechanism of the FDI Screening Regulation has “significantly contributed” to the identification of high-risk FDI transactions. However, Member States should continue to play the main role in assessing and resolving cases in cooperation with other Member States and the European Commission.
With regards to the administrative burden imposed on the parties to the transaction by taking into account the cooperation mechanism, there is broad agreement that this is appropriate and that the national and EU rules for screening foreign direct investment in the EU do not have a deterrent effect.
Improving supranational FDI screening
The evaluation report mentions a number of reform proposals, some of which are familiar and others innovative, to improve the efficiency and effectiveness of the cooperation mechanism and FDI screening. For example, many respondents were in favour of allowing investment control screening of transactions where the direct investor is based in the EU but is ultimately owned by a person or entity outside the EU. In addition, a minimum number of sectors that must be scrutinised by the Member States is advocated.
In addition, a majority called for national authorities to only have to report transactions to the cooperation mechanism if they fulfil certain criteria – as opposed to the current obligation to report all FDI under scrutiny. However, the majority felt that the system should not be framed in a way that allows Member States to only pre-screen and report FDI that they have categorised as a potential risk to public security or public order.
A very important point of criticism for transaction practice concerns the lack of harmonisation of the deadlines of the member states’ investment control regimes, which leads to a noticeable loss of efficiency and increases uncertainty for the transaction parties’ risk management.
Finally, there was a unanimous call for more transparency of information from Member States and the European Commission in their annual FDI screening reports, which led to the proposal to apply common minimum requirements for the content and methodology of reporting.
Upcoming reform of the FDI screening regulation
The European Commission is considering a number of reforms to the FDI Screening Regulation. Denis Redonnet, Deputy Director General and Chief Trade Enforcement Officer at the European Commission, spoke to the European Parliament on 27 November 2023 about possible reforms.
There was considerable support observed in the evaluation report to extend the scope of application of the FDI Screening Regulation to transactions in which the direct investor is domiciled in the EU but is controlled by a non-EU party. Currently, the fact that the FDI Screening Regulation does not cover such transactions means for example that certain types of transactions, e.g. direct investments made by a portfolio company of a private equity investor based in the EU or by companies based in the EU that are controlled by a Chinese investor, do not currently fall within the scope of the FDI Screening Regulation provided there is no “circumvention” of the FDI regulations. The purpose of the extension to “hidden” transactions is therefore, on the one hand, an attempt to get this problem under control and, on the other hand, to eliminate the application difficulties of the FDI screening regulation identified by the European Court of Justice in the Xella case. However, a major obstacle to the implementation of this proposal is the guarantee of freedom of establishment and the free movement of capital within the EU, which could stand in the way of stricter “monitoring” by the FDI screening regulation.
In addition, an attempt should be made to eliminate the existing discrepancies between the autonomous FDI screening mechanisms, in order to increase the effectiveness of the cooperation mechanism. The main problem with the heterogeneity of the autonomous procedures is that critical cases are “overlooked” because the areas of investment screening covered by the national regulations are not harmonised. Guidelines could be drawn up to specify whether specific business activities fall under the sectors categorised as critical.
Finally, the efficiency of the EU screening procedure is to be increased by filtering out “non-critical cases”. In recent years, the number of cases formally examined has “increased significantly”, while the number of cases in which the competent authorities of the Member States have taken action has decreased. In addition, most Member States initiate the EU procedure for all cases reported to them, which leads to a significant increase in bureaucracy. This leads to the assumption that too many “non-critical cases” are being screened and that the authorities’ scarce resources could be utilised more efficiently. The introduction of a legal “filter”, possibly modelled on the German model (i.e. reporting cases only if the Member State concerned has initiated an in-depth examination), is therefore being considered. However, implementation could prove problematic, as each Member State has very different review periods and, in addition, some Member States do not allow a review under the EU screening procedure to proceed in parallel with a national review.
Outlook on FDI screening in the EU
FDI screening will continue to be highly relevant to transactions post-reform, both in terms of national regulations and the FDI Screening Regulations. The evaluation was quickly followed by an adaptation of the main FDI Screening Regulation notification form. Last week Damien Levie, Head of Tech & Security, FDI Screening Unit at the European Commission, announced that “based on three years of experience and more than 1,200 FDI cases assessed” a new notification form to shorten notification procedures and to give the Member States a better understanding of the FDI Screening Regulation process was implemented.
For businesses involved and their legal advisors, close consultation and coordination will be necessary in order to successfully manage the additional challenges arising from investment control.
For further information, please contact:
Veronica Roberts, Partner, Herbert Smith Freehills
veronica.roberts@hsf.com
